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Manufacturing companies likely to gain most from GST

However, companies which are into food processing business may get negatively impacted as they would reap the benefits exemptions extended to processed food items.

twitter-logo Dipak Mondal        Last Updated: December 9, 2015  | 17:49 IST
Dipak Mondal, Assistant Editor
At present, manufactured goods attract 12% excise duty, 5-15% VAT and in case of inter-state sales, a central sales tax of 2-15%. (Photo: Reuters)

Dipak Mondal, Assistant Editor
The proposed Goods and Services Tax (GST ) rate of 17-18 per cent as suggested by a panel headed by Chief Economic Adviser Arvind Subramanian would benefit most companies engaged in manufacturing of goods, according to tax experts, economists and brokerage houses.

"Most goods manufactured in the country have an average 27-30 per cent indirect taxes component. If the proposed standard rate of 17-18 per cent is implemented, the final prices of these goods can come down by 10-12 per cent," says Sachin Menon, partner and head, indirect tax and COO, tax and regulatory services, KPMG in India.

At present, manufactured goods attract 12 per cent excise duty, 5-15 per cent value-added tax (VAT) and in case of inter-state sales, a central sales tax of 2-15 per cent. Besides, some states also impose entry tax and Octroi of up to 15 per cent. With GST, all these taxes would be subsumed and a standard rate would be applicable across the country.

Though initially the government was planning a single uniform rate across the country, due to protests from states, which fear losing out on tax revenue, the government has proposed a three-tiered tax structure to begin with - a low rate of 12 per cent for essential items, a high rate of 40 per cent for luxury cars, tobacco products and aerated beverages, and a standard rate of 17-18 per cent for most goods and all services.

According to a report released by Nomura, the announcement is positive for most FMCG companies. "Currently, most consumer companies in India incur tax rates of around 22-25 per cent, due to which a standard rate of 17-18 per cent should benefit them. We see companies such as Hindustan Unilever, Colgate-Palmolive and Asian Paints benefiting from this recommendation the most, especially as their exemptions have recently expired. One should see a positive effect either in their volumes or through margin expansion," says the report.

However, companies which are into food processing business - edible oils, biscuits, chocolate, cocoa and baked items - may get negatively impacted as they would reap the benefits exemptions extended to processed food items.

"If you look at companies like Marico, their current tax incidence is much lower at 11-12 per cent and therefore, they would get impacted by an 18 per cent standard GST rate," says Jay Shankar, Chief India Economist & Director, Religare Capital Markets Limited.

There are other sectors such as pharma and locally manufactured mobile handsets that enjoy lower incidence of indirect taxes.

According to a Religare report on the impact of GST, sectors such as automobile, capital goods, cement and building materials would gain due to lower incidence of tax post-GST implementation. The report points out that these sectors pay around 24-40 per cent indirect taxes.

The GST is also likely to widen the tax net as Sachin Menon of KPMG says it is very difficult in the GST regime to escape paying taxes. This would benefit the companies that operate in sectors with large number of unorganised players.

"The price competitiveness of the unorganised entities is likely to deteriorate, resulting in narrowing of the price differentials. This is likely to lead to accelerated topline growth and also increase in market share of the organised players," says the report from Religare.

According to Religare, companies like BATA India (Footwear), Kajaria Ceramics, Somany Ceramics (Tiles), Mayur Uniquoters (Artificial leather), Finolex Industries (Pipes), Pidilite (adhesive), etc may benefit from unorganised players losing the price differential benefits post GST.

However, Nomura believes that this can impact Titan, a jewellery manufacturer, in the long run.

According to Nomura, Titan will have to suffer if this recommendation is implemented as competitiveness with the unorganised sector will decrease as they increase prices further, and attractiveness of jewellery as an investment will reduce further.

The government's decision to levy sin/demerit rates at 40 per cent 'on goods and services that create negative externalities for the economy' may be negative for sectors such as tobacco, aerated drinks, luxury cars and pan masala.

The obvious loser in this category is ITC, the largest manufacturer of cigarettes in the country.

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